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Thursday January 28 2016

Ugandans to pay more due to falling Shilling, scarce dollars

A trader counts Uganda Shilling notes. The local currency is expected to depreciate further against the dollar. FILE PHOTO

In Summary

Negative. Parliament has rejected a loan request for stablising the currency.

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By BERNARD BUSUULWA

Kampala. Ugandans face an uncertain 2016 as inflation soars, driven by a depreciated Shilling and a worsening current account deficit.Matters are not helped by Parliament’s rejection of a Treasury request to borrow $200m (Shs695b) from the Eastern and Southern Africa Trade and Development Bank (PTA) for a revolving exchange facility to stabilise the Shilling and finance the balance of payment deficit while cutting down on domestic borrowing.The deficit stood at $353m (Shs1.23 trillion) at the end of June 2015.

Parliament did not see merit in the request, coming as it did in the middle of election campaigns.In 2011, inflation surged to a record high of 30.5 per cent in the aftermath of the general election, sparking public protests.The loan would have been made available immediately, to boost reserves and support the exchange rate during volatile times. However, borrowing to finance balance of payment shortfalls is not provided for in the Public Debt Management Framework 2013, making the request untenable.The rejection leaves the Finance ministry with the option of allowing market forces to determine the value of the Shilling — which means that the Shilling will depreciate unless exports rise and more is invested in productive sectors like manufacturing.

This will improve the balance of payments and reduce drawdown from reserves.“The depreciation augurs well for exporters, but in the event that the exchange rate continues to depreciate, prices of commodities will increase, so we should expect inflation in future, if we choose short term solutions against depreciation,” said Mr Lawrence Bategeka, a businessman and politician.

Rising food pricesInflation rose to 9.3 per cent last month compared with the 9.1 per cent recorded in November 2015, with consumers feeling the pinch of rising food prices as the Shilling depreciated by 27 per cent against the US dollar between September 2014 and September 2015, according to parliamentary research data.“The prevailing currency depreciation pressures are temporary and so the exchange rate should be determined by market forces as well as the monetary policies employed by the central bank to stabilise the rate,” said Mr William Nzoghu, the shadow minister for works and infrastructure development.

Huge investmentsHuge government investments in the energy, transport and health sectors have triggered sharp demand for the greenback in recent months amid limited flows of foreign currency to the domestic market.

For example, diminished inflows from offshore portfolio investors, a major source of US dollar supply, have affected the foreign currency requirements among local corporates, with the Shilling coming under increased pressure at the beginning of the month, financial analysts says.

“In the event that the economy is unable to register a significant rise in foreign inflows, the government should adjust its fiscal policy and opt to cut spending in less critical areas without undermining growth objectives,” said Mr Xavier Kyooma Akampurira, a member of the National Economy Committee of Parliament.The share of outstanding Uganda government securities held by offshore investors fell to around 10 per cent at the end of last year, according to Standard and Poors, a global credit rating agency.

Election effectDeclining exports, weakening foreign direct investment and anxiety related to the February elections have created speculation in the domestic market about the state of fiscal policy and worries over the widening current account deficit.During the first four months of 2015/16 financial year, the value of Uganda’s exports fell by 4.6 per cent compared with the same period in 2014/15, according to Bank of Uganda.External reserves fell to $2.76b at the end of December 2015, equivalent to 3.9 months of imports, short of the East African Community monetary union convergence target of 4.5 months of imports.

inflation rate after the 2011 general elections 30.5%

the rate at which the shilling depreciated against the dollar between september 2014 and september 2015 27%